9 Life Events that can change your taxes.
Every major milestone in your life has the potential to trigger significant changes to your tax situation. Without proper planning, certain events can lead to unexpected tax bills, missed deductions, or complications with the IRS that could have been easily avoided. Here are nine life changes that might affect your next tax return.
1. Marriage
Your marital status on December 31 determines your tax filing status link opens in a new window" for the calendar year. When you tie the knot, you and your spouse must choose between filing jointly or separately. The decision can affect your tax bracket, standard deduction amounts, and eligibility for certain tax credits and deductions. For most married couples, filing jointly is the better option since it typically results in a lower combined tax liability. But you should consult a tax professional to be sure.
2. Birth or adoption of a child
Expanding your family through birth or adoption opens up valuable tax benefits designed to help offset the costs of raising children. For example, the child tax credit link opens in a new window" and the adoption tax credit link opens in a new window" can reduce your tax liability as a new parent, potentially saving thousands of dollars each year. Refer to IRS Publication 972, Child Tax Credit, and IRS Form 8839, Qualified Adoption Expenses, for detailed information on these credits.
3. Buying a home
Becoming a homeowner unlocks tax advantages that can reduce your tax liability and potentially increase your tax refund. You may be able to itemize deductions for mortgage interest, property taxes, and — in some cases — points paid at closing (considered prepaid interest), which could exceed the standard deduction and lead to greater tax savings. Read IRS Publication 936 link opens in a new window", Home Mortgage Interest Deduction, for more details about this valuable tax benefit.
4. High dollar non-real estate purchases
If you recently purchased a car, boat, or RV, you might be able to deduct the state and local general sales tax paid when filing your itemized federal income tax return. The total deduction is limited to $10,000 link opens in a new window" ($5,000 if married, filing separately). Several factors affect the deduction amount:
Filing status
Income
Dependents claimed
Sales tax paid on the item
There are other deduction limitations that may affect whether this option is open to you. For example, homeowners already claiming a property tax deduction for $10,000 link opens in a new window" have already reached their state and local tax deduction limit for the filing year. Use the IRS Sales Tax Deduction Calculator link opens in a new window" to confirm eligibility and see a full list of qualifying purchases.
5. Job changes
A new job can impact your tax situation by changing your income level and potentially shifting you into a different tax bracket. New employment paperwork typically includes Form W-4, Employee’s Withholding Certificate. It’s important that you complete this document carefully, to ensure an accurate withholding and avoid unexpected tax bills or large refunds. Use the IRS Tax Withholding Estimator link opens in a new window" to determine the right amount based on your new salary and circumstances. You can adjust the withholding amount by contacting your employer.
6. Divorce
Ending a marital relationship has lasting tax implications. It affects your filing status, income reporting, and dependent claims. Keep in mind that the IRS considers you married for tax purposes until you have a final decree of divorce link opens in a new window" or separate maintenance. Review IRS Publication 504 link opens in a new window", Divorced or Separated Individuals, to determine which tax rules apply to your situation.
7. Retirement
Retirement alters how your income is taxed. For example, Traditional IRA link opens in a new window" and 401(k) distributions are typically taxable, while Roth IRA withdrawals may be tax-free. Keep in mind that a portion of your Social Security benefits may also be taxable. It’s wise to plan for taxes through estimated payments or withholdings from retirement income to avoid surprises.
8. Death of a spouse
The death of a spouse link opens in a new window" changes your tax situation in ways you might not think. You may file as a qualifying widow(er) with dependent children for two years after the year of death, preserving joint filing rates. However, you’ll still need to address tax matters like inherited retirement accounts, life insurance proceeds, and potential estate taxes.
9. Natural disaster
Natural disasters can affect your taxes through extended deadlines, deductions for property losses, and tax-free assistance. When the IRS declares disaster relief for your area, you can access benefits like extended deadlines and special casualty loss deductions. These disaster-related tax provisions link opens in a new window" can aid your financial recovery with immediate tax relief and potential refunds.
Major life changes don’t have to make taxes a source of financial stress. Schedule a consultation with a qualified tax professional to help you manage taxes as you navigate life’s peaks and valleys.
